Entire capital gains have to be included without computing benefits of indexation while computing 'book profits'

Suraj R. Agrawal

Dharmayug Investments Ltd vs. ACIT (ITAT Mumbai)

While computing the “book profits” as per S. 115JB the entire capital gains have to be included without computing the benefits of indexation.

Facts of the case:

1. The assessee company is engaged in the business of investments, leasing and broking business.
2. The return of income was filed on 29.09.2009 declaring total income of Rs.24,10,290/- under the normal provisions of the Act.
3. Since the tax liability as per the provisions of section 115JB was higher, therefore, taxes were paid as per book profit computed u/s. 115JB.
4. As per the computation of book profit, the income was declared at Rs.21,63,16,156/-.
5. While computing the tax liability u/s. 115JB, the assessee had shown capital gains on sale of shares of HDFC Bank in the month of March 2009, which was claimed as exempt from tax u/s. 10(38) under the normal provisions of the Act.
6. In the computation of income and notes forming part of computation of income, the assessee had shown Long term capital gain claimed as exempt u/s. 10(38) at Rs.1,72,55,70,760/-.
7. Assessee stated that the Long term capital gain to be included in the book profit should be Rs.1,72,55,70,760/- which is calculated as per Income tax act (after taking indexation benefit).
8. The AO held that the Long term capital gain after indexation and the deduction of STT paid cannot be accepted for the purpose of computing book profit u/s. 115JB but the entire sale consideration.
9. Accordingly, AO included the entire sum of Rs.2,04,94,71,614/- while computing the tax u/s. 115JB and for the purpose of income tax, he computed Long term capital gain was taken at Rs.1,72,81,35,774/-.

Issue put before Honorable Mumbai Bench:

1. While computing the book profit u/s. 115JB the income on account of Long term capital gain should include, Rs. 1,90,39,06,630/- i.e. net amount credited or the sum of Rs. 1,72,55,70,760/- computed after indexation.

Contentions of Appellant:

1^st Contention

• Since it was a Long term capital gain asset therefore, in view of the provisions of sections 45 to 55, the said Long term capital gain has to be computed accordingly.
• U/s. 45 only profits or gains arising from the transfer of capital asset alone can be taxed.
• Such a computation of profits and gains arising out of transfer of a capital asset has been given in section 48, which includes indexed cost of acquisition.
• Proviso to section 10(38) makes it abundantly clear that the income by way of Long term capital gain is to be taken into account while computing the book profit and income tax payable u/s. 115JB.
• What is contemplated under the relevant provision is the income by way of Long term capital gain and such Long term capital gain means gains computed u/s. 48 to section 55.

2^nd Contention

• STT of Rs. 25,65,015/- should be allowed as deduction while computing book profit u/s. 115JB.

Contention by Revenue:

• U/s. 115JB, it is mandatory for the assessee to prepare its Profit & loss account as per the Companies Act and the assessee has credited the net gain on sale of shares at Rs.1,90,39,06,630/- in the Profit & loss account, which alone should be taken as income for the purpose of section 115JB.

Ruling of Honorable Mumbai Bench:

• 115JB lays down that every assessee for the purpose of this section “shall” prepare its Profit & loss account for the relevant previous year in accordance with the provisions of part II & III of Schedule 6 of the Companies Act, 1956.
• Thus, for computing the profit and the taxability u/s. 115JB, it is mandatory for the assessee to compute profit as per Profit & loss account prepared under the relevant provisions of the Companies Act.
• The Companies Act does not speak about Long term/ Short term capital gain.
• Accordance with the requirements of the Companies Act, the assessee has credited the net profit on sale of investment i.e. net gain on shares of HDFC Bank at Rs. 1,90,78,63,394/-,.
• While computing the book profit, income u/s. 10(38) will not be reduced and this income here would mean income credited to the Profit & loss account.
• In the opinionof bench, the net amount on account of sale of shares of Rs. 1,90,39,06,630/- will alone be taken into account in computation of book profit and not the amount of Long term capital gain of Rs. 1,72,55,70,760/-after indexation.
• Thus, the assessee’s ground on this score stands dismissed.
• STT amount will not be included in the computation of book profit and only the net gain of Rs.1,90,39,06,630/- shall alone be taken into account.
• In the result, the appeal of the assessee is partly allowed.

Key Take Away

While computing the “book profits” as per S. 115JB the entire capital gains have to be included without computing the benefits of indexation.